Investors continued to trim equity exposure in March as the US-listed ETF industry experienced its second consecutive month of outflows ($1.7bn) – the first time since 2008 that US-listed ETFs had back-to-back months of outflows.
ETFs remain buoyant despite two months of outflows
The S&P 500 posted its best January since 1997 and markets made a flying start to the year. Equities then took a turn for the rocky in February when volatility crept in and the S&P 500 fell almost 4%.
Volatility inevitably had a knock-on effect on ETFs, and outflows that month hit $10bn, according to the recent report by State Street Global Advisors (SSGA), the asset manager behind the popular SPDR range of ETFs.
Despite two months of outflows, however, the $76bn of inflows seen in January meant that the ETF industry recorded its second-best start to the year ever. The industry saw $66bn of inflows in the first quarter of the year, bettered only by Q1 2017 which saw inflows of $134bn.
Similar to February’s outflows, the outflows in March were driven by equities, as the S&P 500 posted its worst trailing two-month performance since August-September 2015. These outflows were largely focussed on ETFs providing US exposure, as flows to international funds rose 63% month-on-month to $6.8bn. Emerging markets continued to see strong inflows, rising an additional $1.2bn in March.
Fixed income ETFs continued their winning streak, attracting $5.3bn in March, although that was significantly lower than the sector’s $9bn monthly average over the past two years. Even though the US dollar total for 2018 is less for bonds than equities, bond funds have increased more as a percentage of AUM (2.8% vs 1.7%) as the usage growth rates in bond funds are higher than those in equity ETFs.
Commodity funds saw modest inflows as investors sought diversification and risk mitigation with the VIX running a higher average this year than last. Precious metals, led by gold-backed ETFs, brought in $942m over the month which, according to SSGA, was driven by headline risk from the recent slew of staff changes in the White House, simmering trade tensions and confusion following the FOMC meeting.
Even though outflows have been high, SSGA is confident that ETFs remain a fundamental building block of investors’ portfolios and the flow of assets simply reflects market movements and not a shift out of passive.